Income tax liability in respect of transfer/sale of a capital asset arises when title in the property is transferred.
Agreement for sale of a commercial office was executed during the financial year 2021-22 but 95% of the payment as per agreement would be received in FY 2022-23 as buyer is contemplating to avail bank loan for purchase of property. What is relevant financial year for reckoning capital gain computation. Will it make any difference if instead of agreement for sale a sale deed is executed and registered? – Rajnesh Agrawal
Answer: Tax liability in respect of transfer/sale of a capital asset arises when title in the property is transferred. For determining the point of time when title in a property is transferred, the date of execution of the document and the nature of document is important. An agreement for sale contains a promise to transfer the property in future, on satisfaction of certain terms and conditions contained in the agreement to sale. This document itself does not create any legal rights or interest in the property for the buyer.
The transaction concludes when all the terms and conditions stated in the agreement to sale are complied with. So in your case, the title in the property will pass on when all the terms and conditions of the agreement are complied with and a proper sale deed is executed.
Date of payment of consideration is not the relevant point for determining when the title in the property is passed to the buyer. If both the parties agree the payment of entire sale consideration may be deferred in future and still the title may get transferred to the buyer. So in your case since agreement to sale has been executed which does not result into transfer of the title in the property, the liability to capital gains will arise only when the title in the property is transferred in future on fulfilment of all the conditions mentioned in the agreement for sale.
However, in case the document executed by you with the buyer is a sale deed and not the agreement for sale as mentioned by you, the title gets transferred on the date of execution of the sale deed even if full sale consideration is not received by you. Since the title in the property has been transferred during the financial year 2021-2022, the capital gains on sale of this property arise during the financial year 2021-2022.